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Tuesday, September 29, 2009

Pointless Public Option

The main reason our system has failed to meet obligations is because our system has failed to provide competition in the market - our system fosters oligopoly formation in the health insurance industry. So of course insurance companies will try to extract super-rents from consumers. But, so long as reform promotes increased competition amongst private insurers both within States and between States, that in and of itself will bring enough competition. We won't need a government run health program to add one more competitor to the mix then.

Obama gets this point. He sees competition as the important issue, not the public option. He understands that we don't necessarily need a public option to get to competition. So, either the left wing doesn't believe reform can increase competition, or they do believe it they just have another agenda....

16 comments:

the competition is not without serious drawbacks, namely a weaker ability to negotiate lower drug costs, and a higher long run average cost because you don't get the economies of scale efficiencies.

Obama gets that single payer is politically impossible, but he doesn't get that he should aim for it so that when you compromise you get something closer to it. There have been leaks that he's cut deals with the drug companies, insurance companies aren't resisting the reform as part of the deal. The Republicans however are resisting any change because any government caused improvement in people's lives will erode their main public selling point.

1. I think our whole patent system needs to be looked at because one of the reasons drug costs are so high is the monopoly power we give drug companies via patent and FDA marketing rights for years on end. We should encourage 'free trade' of drugs across borders (like Canada) and regulate them as opposed to outright banning them. So competition needs to be increased not just amongst insurance companies, but between big pharma companies.

2. Essentially what liberals are saying when they say "no reform works without a public option" is really, "the health industry is a natural monopoly and we need to create a public competitor." I just don't buy that line. Ironically, the 'public competitor' they would create would ITSELF have monopolistic power and while it may be able to provide cheap insurance to some Americans, it would do so at the expense of a higher public cost. I'm simply suggesting the same 'cheap insurance' can be provided by the private market provided we change the fundamentals of the system.

Take the cost savings from not turning a chunk of our government into a health provider and provide that as payment to low-income persons' federally-backed health savings accounts.

Let's say 10 million people are covered by the public option at first....then the next big recession hits.

Now 2 million additional people have no jobs, but since they have to maintain coverage they go to their only choice: the public option.

Recession is over, but the public option has grown to 12 million. Let's ASSUME they don't go back to the private option even though they have jobs again because they generally like the government's low-cost plan (because I believe people maximize an approximation of satisfaction as opposed to real utility when it comes to health care).

Now the next recession hits 5 years later. Another 2 million people lose their jobs, but this is a different 2 million than the previous recession. They opt into the public plan.

"So, either the left wing doesn't believe reform can increase competition..."

or they don't believe that states with 75-90% control by one insurer are going to see any significant gain when that goes to, if you're lucky, 65-80%.

Building infrastructure is difficult and costly; the reason MA's reform worked at all was because they leveraged the existing infrastructure (read: the IRS forms).

Right now, no one is building from-the-ground-up health insurance offerings. If you can explain how to (1) incent that and (2) not just make those incentives a transfer to those firms that are already well-ensconced then I'm all for the 'competition' model.

(Or if you think it's easier just to break the single dominant insurance company—in most markets, iirc, a legacy BC/BS firm anyway—into several sections [a la Ma Bell] so that those small players become significant enough to be legitimate competition, explain how.)

As a logistics model, the so-called "government option" is easier (existing i/s) and less expensive (ibid.).

The result should be the same as has already happened in Canada: private insurers grow and multiply by focusing on niches, comparative advantage, and supplemental insurance, while the government option keeps firms honest enough that a business case for expansion can be made.

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Garth Brazelton

About Me

I work for the Indiana Economic Development Corporation as the Director of Operations and Business Systems, and I teach macroeconomics at Indiana University (Indianapolis). Previously, I was an Economist at the US DOT in Cambridge, MA. This blog does not represent the opinions of any of these organizations.